China Issues Variable DRBased Bonds in Rate Reform Push

Chinas first bond with a variable interest rate tied to a key benchmark dubbed DR was issued on Friday, marking the latest step by the central bank to improve the pricing mechanism for financial markets.

China is joining other major economies in reforming its benchmark rate framework, as the London Interbank Offered Rate Libor, once the most widely used global benchmark, is being phased out.

The Peoples Bank of China PBOC said in August that it will make DepositoryInstitutions Repo Rate, or DR, a key reference for monetary policy adjustment and market pricesetting.

On Friday morning, the ExportImport Bank of China, a policy bank, auctioned a 3billionyuan 458.94 million bond with floating rates pegged to sevenday DR. Rate of the sixmonth bond was set at 2.6, 44 basis points above the benchmark, traders said.

Analysts say such products would help improve Chinas benchmark interest rate system, and facilitate monetary policy transmission.

Floatingrate bonds could also help investors and issuers avert risks from volatility in interest rates, but such instruments account for just 1 of Chinas bond market, mostly using Shibor as benchmark, according to official data.

Shibor, or Shanghai Interbank Offered Rate, is calculated using banks price quotations. However, DR is based on daily repo trading averaging 1.8 trillion yuan, and is the most recognized barometer of Chinas banking system liquidity, the PBOC said in August.

In addition to floatingrate bonds, PBOC is also…

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